2011 (1) TMI 1121 - AT - Income Tax

Business connection - Royalty - location of assets and software in India (through the affiliates of the assessee) and rendering of services in India - Deemed to accrue or arise in India - Section 9(1) - held that - In satellite transmission, a particular frequency is assigned to the customer and in cable transmission, the customer gets a dedicated bandwidth. This is different from the use of a standard facility like the telephone at our homes. A broadband can be divided into two major categories (i) shared; and (ii) dedicated. Shared internet connections include the popular DSL and Cable broadband connections. Dedicated connections are provided by T1, DS3, and Ethernet business services. The term business is to be noticed. Shared Internet services originated to make broadband affordable for residential and home office users. Medium to larger size business have always used dedicated connections for their voice and data circuits. In the bigger picture, the entire internet is a shared bandwidth resource. With a dedicated connection, one s bandwidth is set aside by the service provider and always available for one s use. Order of CIT(A) confirmed wherein it was held that, to avoid tax liability, apparently, MCI has split the lease charges for the IPLC circuit into two non-existent half circuits. Thus, MCI is trying not to acknowledge its liability on the quantum of lease charges arising in India and received by it by resorting to subterfuges. It is a fact that MCI has provided the single, composite and indivisible circuit which constitutes equipment . It has merely taken VSNL as a Provisioning Entity for providing the local part of services in India. In the alternative, the payments made for IPLC service may also be held to be for the use of process and, hence, would amount to payment of Royalty. The order of the Assessing Officer that payments received by the appellant was royalty for use of equipment and related services is therefore, confirmed

Summary

Issues Involved:
1. Taxability of payments received by a non-resident company for providing international connectivity services.
2. Classification of payments as "royalty" under the Income Tax Act and the India-Singapore Tax Treaty.
3. Determination of Permanent Establishment (PE) status in India.
4. Levy of interest under sections 234A and 234B of the Income Tax Act.

Detailed Analysis:

1. Taxability of Payments Received by a Non-Resident Company:
The assessee, a non-resident company, provided international connectivity services and filed returns declaring NIL income, claiming that the services were provided outside India. The Assessing Officer scrutinized the returns and concluded that the payments received were taxable as royalty under section 9(1)(vi) of the Income Tax Act and the India-Singapore Tax Treaty. The assessee argued that it did not have a Permanent Establishment (PE) in India and that payments received were not taxable in India as the services were provided outside India.

2. Classification of Payments as "Royalty":
The Assessing Officer and the CIT(A) held that the payments received by the assessee from Indian customers for the provision of international connectivity services were in the nature of royalty for the use of equipment and related services. The CIT(A) further stated that the payments could also be classified as royalty for the use of a process. The Tribunal agreed with this view, stating that the customer acquired significant economic or possessory interest in the equipment to the extent of the bandwidth hired. The Tribunal referred to various agreements and concluded that the payments were for the use of tangible equipment and could be considered as royalty under the Income Tax Act and the India-Singapore Tax Treaty.

3. Determination of Permanent Establishment (PE) Status:
The assessee contended that it did not have a PE in India as its Indian associate, MCI India, did not have the authority to negotiate or conclude contracts on its behalf. The Tribunal examined the agreements and found that MCI India acted as a channel of communication and provided marketing support, but did not constitute a PE. However, the Tribunal concluded that the payments received were taxable as royalty, irrespective of the PE status, due to the significant economic interest in the equipment.

4. Levy of Interest under Sections 234A and 234B:
The assessee challenged the levy of interest under sections 234A and 234B, arguing that the payments received were not taxable in India. The CIT(A) rejected the submissions, and the Tribunal upheld this decision, stating that the payments were taxable as royalty, and therefore, the interest levied under sections 234A and 234B was justified.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee and upheld the findings of the Assessing Officer and CIT(A) that the payments received by the non-resident company for providing international connectivity services were taxable as royalty under the Income Tax Act and the India-Singapore Tax Treaty. The Tribunal also dismissed the cross-objections filed by the revenue as infructuous.